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The Stock Market And The Federal Reserve

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Friday, August 26, 2022, Federal Reserve chairman Jerome Powell spoke at the conference at Jackson Hole, Wyoming.

Since then, the stock markets have been declining.

Investors have trained almost all their focus on the economy and the role that the Federal Reserve is now playing in the economy.

Mr. Powell stated that the Fed must continue raising interest rates and must hold them at a higher level until policymakers are confident inflation is under control.

That is the Fed must see the inflation rate drop to around 2.00 percent, its policy goal, and must be confident that the rate of inflation will remain around this level.

Late Friday, investors signaled that they believed that the probability that the Fed would give us another 75 basis point rise in the range of its policy rate of interest was around 0.73.

The probability is up substantially from one week ago.

Movement In Stock Market

Here is how the S&P 500 stock index performed.

S&P 500 Stock Index–since August 25 (Federal Reserve)

This decline in the index is 6.5 percent.

This decline took place as Chairman Powell spoke out more strongly than before that the Fed was committed to reducing the rate of inflation and would do what was necessary to get the inflation numbers down.

It should be noted the round of tightening really began in the middle of March as the Fed made its first move this year to raise the policy rate of interest. The stock market began to decline soon after that.

S&P 500 Stock Index–beginning early March (Federal Reserve)

The movement in stock prices has not been steadily downward.

As has been discussed in this post, investors do not have complete confidence in Mr. Powell and the Federal Reserve.

As a consequence, over the four months or so, investors have debated whether or not the Fed will really carry out the fight to reduce inflation.

As can be seen from the chart, there has been some resistance to falling stock prices over this period of time, as investors have transferred this lack of complete trust in Fed leadership into rising stock prices.

This is the primary reason that Mr. Powell felt he had to speak out last Friday at Jackson Hole. Mr. Powell felt that he had to be somewhat dramatic and convince investors that he really meant what he was saying about Federal Reserve tightening.

The Fed… he emphasized… was going to stick to it.

So, there you have it.

Or, Not

But, there are still doubters.

Prominent analysts like Mohamed El-Erian spoke out in the Financial Times.

Thomas Sargent and William Silber spoke out in the Wall Street Journal.

And, Niall Ferguson spoke out on CNBC.

The basic feeling of these speakers is that Mr. Powell has not really gone far enough and is unwilling to admit to the Fed’s massive injection of liquidity into the financial system since early in 2020 and the beginning of the fight against the effects of the Covid-19 pandemic.

By not accepting the size of the monetary expansion and by not accepting the magnitude of what must really be done, Mr. Powell and the Federal Reserve are not in a position to do all that must be done to correct the inflationary situation.

Therefore, the feeling is that Mr. Powell will back off at some time because the size of the job he must do has not been fully recognized.

Why do people feel this way?

Well, because Mr. Powell originally felt that the first rush of inflation was “transitory”.

Supply-side factors would soon reside.

And, so on and so forth.

Furthermore, Mr. Powell, throughout the Fed’s reaction to the Covid-19 pandemic has always wanted to err on the side of monetary ease.

Mr. Powell has constantly shown that he has a fear of making a mistake that will result in bad things happening.

And, the investment community recognizes this behavior pattern. Therefore, the investment community is not willing to fully “trust” that this man will do all that is necessary to combat the inflationary pressures.

So, there are still doubters out there.

I, for one, believe that these doubters have some justification for hanging onto their doubts.

We, therefore, have to live with this unknown… this uncertainty.

The Stock Market And The Federal Reserve

Well, here we are spending another weekend worrying about the stock market and the Federal Reserve.

This, to me, tells us the whole story about the problems we are facing.

As I have said before, when the Federal Reserve has done its job and is really doing its job, you don’t hear much about the central banks and what is going on.

In recent times, almost all the discussions about what is happening in the stock market include debates about Federal Reserve actions. The stories are dominated by the presence of the Fed.

This is not the way it should be.

The Federal Reserve is included in these current discussions because the Fed is not doing its job, has not done its job, and this provides us with no confidence that, in the future, it will get the job done.

This radical uncertainty is not what is needed at this time.